The Rising Influence of Rising Affluence

[Titan V]

Why aluminum tariffs are hurting Alcoa more than helping
https://www.marketwatch.com/story/why-trump-administrations-aluminum-tariffs-are-hurting-alcoa-more-than-helping-2018-07-19

Investors who thought the tariffs imposed by the Trump administration would help U.S. aluminum producers can think again—Alcoa Corp. says they actually hurt.

Alcoa reported late Wednesday second-quarter earnings and revenue that rose above expectations, but lowered its outlook for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), citing factors such as current market prices and tariffs on imported aluminum.

The stock AA-13.34% plunged 12.6% toward a seven-month low in afternoon trade, enough to pace all the decliners listed on the New York Stock Exchange. Volume ballooned to over 14 million shares, or more than five-times the full-day average, according to FactSet.

That selloff would be the second biggest in the past nine years. The biggest decline was the 13.5% tumble the shares suffered on April 23, 2018, after the U.S. extended the deadline for dealing with Russia-based aluminum giant United Co. Rusal HK:0486-1.4% which is controlled by Oleg Deripaska, who was sanctioned for his involvement in U.S. elections meddling.

For investors who thought the 10% tariff on aluminum imports was supposed to be good for U.S. aluminum producers, Alcoa Chief Executive Roy Harvey explained on the post-earnings conference call with analysts why it’s actually the opposite.

“First, because tariffs are driving only a limited increase in supply, U.S. imports will remain essential," Harvey said, according to a transcript provided by FactSet.

He said the restarted production capacity attributed to the tariffs has totaled 300,000 metric tons, or just 0.5% of the 5.7 million metric ton U.S. market, and all of that from Alcoa competitors.

“More importantly, even if all U.S.-curtailed capacity was back online and producing metal, the U.S. would still need to import the vast majority of its required primary aluminum, with approximately 60% from Canada, which is key to the North American supply chain,” Harvey said. “Canada is an important source of metal for U.S. aluminum producers.”

Alcoa operates three smelters in Canada, which import into the U.S. Starting in June, Harvey said, he expected a $12 million to $14 million negative monthly impact “as long as tariffs are in place,” which reduces some of the benefits the company would see from higher premiums in the U.S.

Second, the tariffs have yielded “mixed” results, as the benefit of higher premiums was offset by a distorted market and increased costs for manufacturers.

“While tariffs have pushed the Midwest premium higher, providing U.S. aluminum producers with a benefit, there is no long-term certainty to the duration of those tariffs,” he said. “Tariffs also distort the market by incentivizing the restart of aged, inefficient capacity, which contributed to the curtailments and closures in the first place.” The newest U.S. smelter, he said, is about 40 years old.

Basically, Chief Financial Officer William Oplinger said Alcoa has two choices for what to do with the aluminum produced at its Canadian smelters: Either pay tariffs on imports into the U.S., or sell it outside the U.S. at a lower premium.